July 18, 2011

Why not raise taxes?

My answer to the question posed by NPR’s Michael Krasny this morning, about why Republicans are against raising taxes on the rich.

Higher taxes have unintended consequences. Raising taxes, beyond a certain 'sweet spot', lowers revenues for more than one reason. Generally, the people who are supposedly helped by raising taxes on the rich, namely the poor and the middle class, are the ones most hurt by the tax.

If you ask an adult whether they'd rather be on unemployment insurance or working, the overwhelming answer would be working. If your intention is to help the downtrodden and the lower classes, you would naturally promote an economy that provided jobs. The more jobs to choose from, the happier the worker. But when jobs are scarce, the selection of jobs is low, and there is downward pressure on both wages and conditions. Money runs out for the long term unemployed and they become desperate. I know because I experienced extended unemployment, when I got out of the army in 1972, again in 1991 and in 2005.

But why would revenues decrease if we raise taxes on the rich? One reason is the rich don't want to pay increased taxes, so they hire tax consultants to help them avoid taxes. I lived next door to a tax consultant, who explained that he found ways for rich people and businesses to invest their money to avoid taxation. The result is that the rich avoid taxes as much as possible by investing their resources in businesses they are not familiar with. It results in a decrease of efficiency. To the extent that elevated taxes does sting the rich, that much money is taken out of the private sector. It's money that is not being put at risk, by investing in factories or new small businesses. Less factories and fewer start ups means fewer jobs. And because there are fewer jobs, revenues fall short of expectations.